Data Belies Belief That Market Bubble Optimism Doesn’t Exist Today
Contrary to what the talking heads say on the financial news, stock market optimism is back. It’s at record highs, as a matter of fact. Extreme optimism is a hallmark indicator of a market bubble.
According to the University of Michigan’s most recent consumer survey, 65% of respondents believe stock prices will be higher in 12 months. That’s a record high. (Source: “Investors Have Never Been More Optimistic,” Zero Hedge, September 15, 2017.)
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This survey isn’t some obscure data sheet nobody follows. It’s included on every economic calendar, and occasionally moves markets. Bloomberg Markets even has its own dedicated “University of Michigan Consumer Sentiment Index.” They are some of the most reliable sentiment numbers around.
Despite the clear-cut data, Wall Street is busy telling Main Street not to worry.
Earlier this week, Goldman Sachs Group Inc (NYSE:GS) strategist David Kostin said that subdued optimism and strong consumer spending would prevent a stock market correction. Because of this, Kostin believes there’s little chance that the market will slide anytime soon. “Investors today are situated between skepticism and optimism,” he said. (Source: “Goldman says so many investors are expecting a market correction that means it likely won’t happen,” CNBC, September 11, 2017.)
I’m not sure what data Goldman Sachs is looking at, but it surely doesn’t emanate from the University of Michigan.
So Who Should Investors Believe?
From my perspective, agnostic investor optimism as proclaimed by Goldman Sachs is absurd. “Fake news,” if you will. Certainly, there are volumes of evidence that corroborate the U of M’s findings. It’s everywhere, really.
Let’s start with margin debt, which is at record highs. It’s currently pushing $550.0 billion, which is around 2.86% of gross domestic product (GDP). That’s easily an all-time record, eclipsing the 2.63% mark in mid-2007 and 2.78% in 2000. (Source: “July 2017 NYSE Margin Debt Record,” Greedometer Blog, August 25, 2017.)
If record amounts of margin debt and associated risk-taking is not a sign of “investor optimism,” I’m not sure what is.
Next up: a recent surge of optimism among U.S. investors has propelled the Wells Fargo/Gallup Investor and Retirement Optimism Index to 17-year highs. Not only that, a 98-point hike over the past 18 months is the largest increase in the index’s 20-year history. A full 68% are optimistic about the stock market—tied for the most on record. (Source: “U.S. Investor Optimism Rises Again, Hits 17-Year High,” Gallup, Inc., September 8, 2017.)
I’m pretty certain that this data point is a tad…optimistic.
There’s also the fact that the National Federation of Independent Business (NFIB) optimism survey shows that small businesses are the most bullish business prospects since 2005. It’s not direct proof of investor optimism, but the correlation is very strong. Business optimism and investor optimism go hand-in-hand.
As for the “strong consumer” meme, I think Goldman Sachs is off base there, too.
Whether it’s auto loan delinquencies pushing five-year highs, credit card charge-off rates rising to 2011 levels, or the 10-year high in retail bankruptcies, nothing screams “strong consumer” to me. These are just a sampling of facts. Trust me, there’s much more evidence I could expound on.
In the end, it’s difficult for retail investors to know what to believe. Wall Street portrays a bullish narrative, backed by “proof” inferred by rising stock prices. But it’s hard to separate the investment banks “talking their book” from honest brokers stating an honest opinion.
But one thing I can state for certain: if anybody tries to tell you there isn’t a market bubble raging today, run away. The evidence of a bubble is crystal clear.
